Is the tech industry really the American economy's knight in shining armor?

Turns out the great recession wasn’t the most impactful economic event of our adolescence. A worldwide productivity slowdown that’s been plaguing our planet since early 2005 is to blame for sluggish wage growth and sub-par living standards across the globe.

“Labor productivity has been growing at an average of only 1.3 percent annually since the start of 2005, compared with 2.8 percent annually in the preceding 10 years,” reported the New York Times’ Tyler Cowen.

“Without somehow improving productivity growth, living standards will continue to lag.”

Back up…

Economic productivity can be loosely defined as the amount of output per unit of input, that according to GenFKD’s very own Kevin Gomez.

A productivity slowdown occurs when a labor market and capital (the input) don’t produce enough goods and services (the output) to keep pace with normal economic growth. In this situation, an economy is still technically becoming more productive, just at an abnormally slow rate.

Economic output can decelerate due to a decrease in the number of hours worked, a decrease in the productivity of those hours or a combination of the two.

In the United States, both of those factors have slowed significantly  since before the 2008 recession, causing U.S. GDP to come up approximately $2.7 trillion short than if we had maintained our initial growth rate.

Is there such thing as too much technology?

This so-called “productivity crisis” may be the reason why we haven’t seen any real wage growth, despite other signs of economic growth, including a low unemployment rate. The lack of growth in productivity of American workers has coincided with a lack of wage growth for those same workers.

But why the slowdown in the first place?

Many economists are quick to point the finger at the technology industry, suggesting that advancements like Google, Wikipedia and Uber have made life easier, but not necessarily more productive.

What started out as a tech-boom from 1995 to 2003 quickly gave way to a slowdown shortly thereafter. Conversely, the slowdown in productivity today is reportedly “concentrated in industries that produce or use information technology intensively,” according to a 2015 study from the San Francisco Fed.

“The exceptional boost to productivity growth from information technology in the late 1990s and early 2000s has vanished during the past decade…returning to roughly its pre-1995 pace.” The implication here is that tech productivity is simply evening out after the substantial gains made during the 1990s.

A measurement problem, not a productivity problem

But not everyone is buying the “failure of technology” theory. Chief economist at Google, Hal Varian, contends that the tech sector isn’t slowing economic productivity – it just offers benefits that are difficult to measure.

“There is a lack of appreciation for what’s happening in Silicon Valley,” said Varian, “because we don’t have a good way to measure it.”

Varian goes on to describe how most highly productive technologies out of Silicon Valley come at no cost to the user – like Google, Wikipedia and budding ride-hailing services.

The problem is, the U.S. government’s formula for economic productivity – economic output per hour worked, as measured by GDP – doesn’t account for any of these free goods and services, no matter how much they aid productivity and efficiency.

“GDP was conceived in the 1930s, when economists worried mostly about how much, for example, steel and grain were produced,” explains Varian. “[This] output [is] easy to measure compared with digital goods and services.”

Not so fast…

Unfortunately for Silicon Valley, there’s also evidence suggesting that information technology isn’t our economy’s undercover white knight after all.

Simply put, the tech sector isn’t big enough to explain the large gap in productivity alone.

For example, we’ve seen a 15 percent decrease in GDP due to the productivity gap. In 2004, the tech sector was far too small – only 7.7 percent of GDP – to account for such a large gap on its own. It’s safe to say that the tech sector today couldn’t do so either. This implies that the slowdown spans across different industries outside of the tech sector.

Also keep in mind that dozens of economies experienced a productivity slowdown during this same time period, indicating that the productivity slowdown is a “general phenomenon,” explains Cowen.

“The countries with smaller tech sectors still have comparably sized productivity slowdowns, and that is not what we would expect if a lot of unmeasured productivity were hiding in the tech industry.”

What Gives?

Truth be told, only more time and research will explain the productivity gap in its entirety.

The measurement problem, the tech problem and its counter-argument all hold weight, as does the idea that our economy simply rides waves of productivity.

“Is it possible that the current slowdown is a short-term aberration, and that as the advanced economies emerge from this period of economic crisis, faster productivity growth will also reemerge,” said Mark L.J. Wright, a senior economist at the Federal Reserve Bank of Chicago, in a January 2013 Fed letter.

Until then, hold on to your entry-level salaries and pray for a miracle.

Header image: Oli Scarff / Getty

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Posted 03.22.2016 - 05:51 pm EDT